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It’s official: The Bush tax plan loses trillions and worsens inequality

Source: Tax Policy Center

The authoritative, nonpartisan Tax Policy Center is out with their analysis of Jeb Bush’s proposed tax cut. There’s good stuff (eliminates some wasteful deductions) and bad stuff (you’ll see) in the Bush plan, and I give Jeb!’s campaign credit for articulating enough details such that the TPC could model the prospective outcome (as opposed to Trumpian hand waving).

From my perspective, and I suspect from that of most voters, the bad stuff in the plan far outweighs the good. Based on the limited information available when Bush released his plan, I suggested then that its impact would be both regressive and costly, exacerbating inequality by boosting the after-tax income of the wealthy much more than the poor and middle class and adding trillions to the deficit. The TPC confirms these impressions, which raises an interesting political question: In a world where groups like the TPC exist, i.e., a world where the fiscal and distributional implications of plans like this will be there for all to see, why are Republican candidates inexorably drawn, like the moth to the flame, to tax plans that are both regressive and deficit-increasing? Hold that question for now, while we go through the TPC’s findings.

First, the Bush plan lowers tax rates on both individuals and businesses, on both earnings and investment income. It repeals the estate tax, and shifts to a territorial system for multi-national corporations (meaning they don’t have to pay U.S. taxes on foreign earnings…not that they do much of that anyway). On the other hand, the plan eliminates the business interest deduction (on debt-financed spending/investment) and limits the “step-up basis” for capital gains passed on to heirs at $5.4 million this year (that’s the current estate tax threshold, indexed to the CPI; amounts above that level would be subject to taxation). Bush also proposes to significantly increase the EITC for childless adults.

TPC estimates that the plan would lose $6.8 trillion in the first decade relative to the current tax code, and $8.6 trillion in the next decade; that’s 2.6 and 2.3 percent of expected GDP over these years. Their analysis is “static,” meaning it doesn’t build in any positive macroeconomic growth effects that some economists assume would result from lower tax rates on work, saving, and investment. However, unless those tax cuts were offset by spending cuts, many economists also assume that the higher deficits and debt they’d generate would lead to higher interest rates (as public borrowing crowded out private borrowing) and slower growth.

I’m largely unsympathetic to both of those assumptions — growth effects and interest rate effects — based on their weak empirical record. But the key point is that you can’t legitimately argue that dynamic scoring gains would offset tax cuts of this magnitude.

Could a Jeb administration plausibly cut that much spending? Not a chance. The current Congress has consistently shown that they can’t abide by the sequestration spending caps they imposed a few years ago, and for good reason; those caps are the antithesis of thoughtful budgeting. And based on demographics alone — forgetting about any new initiatives, like improving our public goods — we’re going to need more, not less, spending.

Distributionally, the TPC data show that the bulk of the tax cuts go to the wealthy: 39 percent accrue to the richest 1 percent, 10 percent to the middle fifth, and 2 percent to the bottom fifth. The figure above shows the percent change in after-tax income due to the tax plan in two time periods, compared with current law. Apparently, Bush’s plan becomes more regressive over time: its impact on after-tax income increases in the second decade for the top 1 percent (and top 0.1 percent) while remaining unchanged elsewhere.

Team Bush is arguing that if you look at the percent decline in the amount of taxes paid, the poorest get the biggest cuts. That’s because they pay so little to begin with, especially compared with the wealthy. The bottom fifth pays about $600 in federal taxes, so the $185 tax cut they get from Jeb comes to a 30 percent cut in taxes paid. The top 1 percent pays $800,000 in taxes, so their nearly $170,000 amounts to a smaller 21 percent cut.

But those numbers don’t provide important information about who benefits from the tax cut because they fail to reveal its distributional impact. For that, you need to see which income group’s after-tax income grows the most (in percent terms) as a result of the cuts. As shown above, in this plan, that’s the wealthy.

So, to return to my previous question, why does the plan go there? And I’m not just asking about Bush; I suspect Marco Rubio’s plan will score even worse on the progressivity/revenue-loss criteria.

I’ve often stressed that this is a) all about paying the piper (giving your rich funders a return on their investment) and b) consistent with the supply-side fairy dust these folks have peddling since Reagan. In that regard, it’s about the only arrow in their quiver. Ask them about growth and jobs, and you get back these sorts of tax plans.

But again, what’s puzzling is not just that the economic evidence isn’t there; it’s that the political evidence isn’t there either, at least not anymore. Mitt got creamed on this part of his agenda and it’s not clear to me why Jeb, Marco, The Donald or whoever else won’t suffer that same fate.

On a panel discussion the other night, Jimmy Pethokoukis from AEI reminded us of the old Robert Novak quip that “God put Republicans on earth to cut taxes…failure to do that means they have no useful function.” I can’t speak for the Creator, but if that’s all they got, then I kinda have to go with Novak re that part about no useful function.